The Reserve Bank of Australia (RBA) has left the cash rate on hold at 0.75 per cent at its February meeting, in what was a decision that was widely expected by the market.
Over the past few weeks, economic data has been on the improve and that has made a strong case for rates to be left unchanged.
We’ve seen a better than expected CPI and a fall in the unemployment rate. Two of the key measures that the RBA has been looking for in recent times.
Financial markets had been pricing in a 28 per cent chance of a 0.25 percentage point rate cut to 0.5 per cent, although that was up slightly thanks to fears surrounding the coronavirus outbreak.
In the accompanying statement, RBA Governor Phillip Lowe suggested that interest rates will likely continue to remain low for an extended period until the economy improves.
“With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting,” he said.
“Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.
“There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year and inflation remains low almost everywhere.”
Mr Lowe also acknowledged the impact that low rates were having on property prices.
“There are continuing signs of a pick-up in established housing markets,” Mr Lowe said.
“This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued.
“Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.”
Tim Lawless, head of research at CoreLogic feels that the RBA needed to keep some room to cut rates further should the need arise.
“The hold decision was generally expected, especially considering the increased uncertainty brought about by the extent of bushfires domestically as well as the unfolding implications associated with the coronavirus outbreak,” Mr Lawless said.
“The RBA may need to keep some rate-cutting ammunition up their sleeve should these scenarios play out more severely than expected.
“To date, lower interest rates haven’t flowed through to a material improvement in economic conditions, but housing markets have well and truly responded, with national housing values rising 6.7 per cent since the first rate cut in June through to the end of January.
“Importantly, we may be seeing some early signs that strength in housing markets is transferring through to other sectors, with dwelling approvals recording their first annual rise since mid-2018 and the value of new mortgage commitments up 5.9 per cent over the year to November, driven by a 10 per cent increase in owner-occupier commitments.
“Although rates remained on hold today, we are expecting the RBA to cut the cash rate later in 2020. Further rate cuts could fuel home buyer demand, although we don’t expect future cuts to the cash rate to be passed on in full to mortgage rates.”
Soft consumer confidence
Mortgage Choice CEO Susan Mitchell believes that while the economic data is on the improve, a lack of consumer confidence is weighing on the RBA.
“Another reason the RBA may have decided to hold the cash rate this month is dwindling consumer confidence,” Ms Mitchell said.
“The latest Westpac-Melbourne Institute Index of Consumer Sentiment revealed that consumer confidence fell over January, due in part to the devastating bushfires.
“The low level of confidence is consistent with generally lacklustre reports on consumer spending and Board members. Pleasingly, the Index points to ongoing confidence in the housing market.
“Indeed, the turnaround we saw in the housing market in 2019 has continued into 2020 as dwelling value growth is supported by the low interest rate environment.
“The CoreLogic Hedonic Home Value Index revealed that Sydney and Melbourne recorded stand-out value growth in January, while national dwelling values rose 0.9 per cent over the month.
“With interest rates at historic lows, I don’t see the strong demand for property abating any time soon,” Ms Mitchell said.
Looking ahead, Ms Mitchell expects future cash rate cuts to be just a matter of time.
“In the minutes of its December Board meeting, the RBA Board said it would be prepared to ease monetary policy further.
“Unless we see a dramatic improvement in key economic data, another cash rate cut is just around the corner.”
Bushfires and coronavirus worries
Finsure Managing Director, John Kolenda said, with the RBA cutting the cash rate three times last year to bring it to a record low of 0.75 per cent, the central bank has started the new year with some different challenges.
“The RBA has seen the impact of the devastating bushfires over the summer and now we have a new global crisis with the coronavirus,” Mr Kolenda said.
“The virus has left large parts of our biggest trading partner China in lockdown and now the federal government has placed a travel ban on people coming to Australia from anywhere in mainland China.
“As well as the fears of this disease spreading around the globe, we have no idea of its long-term economic impact, which will effectively place RBA rate movements in quarantine.
“The RBA is aware that reducing rates now will have no impact and it will hold off until the current challenges subside.”
RateCity.com.au research director, Sally Tindall, feels the RBA is waiting for more information before acting.
“The RBA is adopting a wait-and-see approach. While inflation and employment are tracking in the right direction, the Board needs time to assess the impact of the unfolding coronavirus and bushfire crises on the economy,” Ms Tindall said.
“If the RBA does cut the cash rate again, we could see variable rates drop to below 2.50 per cent, potentially lower if lenders get into a rate war.”
